The Trades

Buy to open the April 20, 2018 call on Bioverativ (NSDQ: BIVV) with a strike price of $55 at $3.85 or lower. Symbol (BIVV180420C55)

Buy to open the March 16, 2018 call on Celgene (NSDQ: CELG) with a strike price of $110 at $6.35 or lower. Symbol (CELG180316C110)

Buy to open the March 16, 2018 call on Emergent BioSolutions (NSDQ: EBS) with a strike price of $50 at $1.80 or lower. Symbol (EBS180316C50)

*I suggest a $.05-.10 range on the limit prices. Take your time. There is no near-term term event that requires you to enter these trades immediately so you can wade in with half a position today and half later with the hope that prices come down a bit.

The Rationale

Drugs stocks have taken a beating this year and partly for good reason; this is the year that prescription benefit managers woke up to sky-high drug prices and began demanding better terms. Also, many of the mega-cap pharmaceuticals are seeing sales of their largest drugs slow and cannot find acquisitions big enough to move the needle on earnings.

Yet there are signs of good news:

1. Drug companies with new product launches are becoming increasingly practical about their methodology about choosing drug prices. Companies that are able to preserve pricing and grow earnings via higher volume of drugs versus increased prices, should trade higher.
2. Valuations on many drug stocks have fallen to levels that do not reflect earnings momentum.
3. In a perverse way, the massive antitrust review of the proposed $69 billion Aetna/CVS deal may slow pricing pressure on drug companies as management’s focus shifts to getting the deal approved.

The three drug stocks that I have chosen all trade at P/Es (price to earnings ratios) that are less than their earnings growth rates:

1. 2018 earnings estimate for each of them has risen in the past 6 months.
2. Each one generates positive cash flow and is profitable.
3. Each one’s lead product shows signs of momentum.

Bioverative (NSDQ: BIVV) isn’t a household name but it’s linked to one of the biggest biotech companies in the world. It was spun out of Biogen (NSDQ: BIIB) last winter. Its focus is on the hemophilia market, where its two drugs, Eloctate and Alprolx, are gaining share. As preventative drugs, usage is significantly greater than for treatment options already on the market.

News of a failed Crohn’s Disease product trial clobbered Celgene’s (NSDQ: CELG) stock in October. Favorable news from one of its early stage cancer treatments at a recent industry event and better than expected results of its Abraxane drug in breast cancer patients should move the stock higher.

Emergent BioSolutions (NSDQ: EBS) develops vaccines and antidotes for public health concerns. For example, it recently won a $63 million award from an antidote spray for suspected cyanide poisoning. Government contract bureaucracy limits competition.